If you’ve read any of the past music industry articles on The Indie Files, you’ve likely heard me say time and time again that if you’re trying to make money as an indie musician or band, you’re most likely legally in business (whether you intend to be or not). Being in business has its benefits (like bigger tax deductions for your equipment and other expenses), but it also has its responsibilities. One such responsibility is the self-employment tax, if you’re a US artist. Seeing as tax time is right around the corner, here’s what the self-employment tax can mean for you:
What is the Self-Employment Tax?
It is a US federal tax, collected by the IRS. It is a social security and medicare tax, payable by freelancers, independent contractors, and some business owners. (In this case, you would classify as a freelance musician.) When you work as someone’s employee, these taxes are generally paid half by you (withheld from each paycheck) and half by your employer. When you’re self-employed, you serve as both the employee and the employer, so you pay the whole tax yourself.
How much is the Self-Employment Tax?
According to the IRS web site (www.irs.gov) the current self-employment tax rate (as of September 2005) is 15.3%, with 12.4% going to Social Security and 2.9% going to Medicare.
How do you know if you have to pay the Self-Employment Tax?
You owe self-employment tax if you make more than $400 from self-employment activities during the year, even if you only complete those activities part-time while holding a regular full-time job. (So even if you work a “real job,” if you make over $400 from your music – selling CDs, live shows, etc. – you owe the tax.)The tax must be paid throughout the year, as you’re earning your income, just like employees who have to make contributions from each paycheck. You have to make what are called “estimated tax payments” throughout the year if you expect to owe $1000 or more in taxes, by using schedule SE. You can’t just wait until you file for your tax return at the end of the year. There are some exceptions, as with most tax rules, so be sure to check the IRS site for more information about how the Self-Employment Tax might apply to you.